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Best of ABA TECHSHOW: Alternative Billing

By Jim Calloway and Natalie Kelly

Alternative billing is certainly not new to the legal industry. However, with unprecedented changes in the economic climate during the last couple of decades and the resulting chaotic financial backdrops for many law firms, now is a good time for lawyers to really look at what makes alternative billing both economically feasible and practically realistic.

This "Best of ABA TECHSHOW^®" article was originally presented at ABA TECHSHOW 2010, the World's Premier Legal Technology Conference and Expo. It's just one example of the terrific content offered at ABA TECHSHOW by more than 50 legal technology experts. ABA TECHSHOW 2011 will be held April 11-13 2011 at the Hilton Chicago. Get registration and other information at www.techshow.com.

Alternative Billing Tools

As with regular billing, the basic tools for generating alternative bills include pre-bill analysis tools, recording or logging tools, bill generation and delivery tools, and post billing analysis tools. The nature of alternative billing could be said to be simply a shift in the way firms use “time” as the commodity and to more of the “value” or the “legal service product” as the commodity.

Below is a general review of the tools as would be encountered during a generic alternative billing arrangement and billing cycle.

Pre-bill analysis Tools

Firms considering alternative billing arrangements must first analyze the current billing situation. They should pay attention to the impact of practice areas, firm compensation plans, firm access to additional capital and credit, outstanding accounts receivable and cash flow needs, and other pertinent financials for the firm.

Equally important is the need for firms to analyze and anticipate whether or not alternative fee arrangements are even wanted, and whether or not they will likely be accepted by clients. For instance, it's easy to say that current clients would prefer to have a flat or a fixed fee. However, it would be more prudent for the firm to see whether or not this is desired by most or just a few of its clients, and whether or not giving the clients a choice is going to be the most effective route for the firm.

By taking three years of a firm's financial statements and any existing budgets and forecasts, the firm should be able to look at income, outstanding amounts owed, and any anticipated future gains to help determine a starting bottom line for determining where to begin with setting up alternative billing. This information will initially allow the firm to determine if they can begin to transition both existing and new clients to alternative arrangements, and if the overall undertaking even makes financial sense for the firm as a whole. Of course, modifications will need to be made to existing fee agreements and any engagement statements that will be affected by this shift.

Special attention will need to be paid to practice areas, as it is not likely that some shifts would make sense or even be ethical in some cases. For instance, a personal injury firm may find that it's simply easier to continue to work on a contingent basis for its matters, at least until say some periods of litigation become necessary, and it would then be more appropriate to shift to the firm standard of fixed billing for litigation.

So, basically a short list of pre-analysis tools would include:

• firm financial statements
• existing accounts receivable reports
• existing budgets and forecasts
• current bank statements
• firm compensation plans and reports
• written fee agreement samples and existing forms
• engagement letter samples and existing letters
• client feedback and survey reports

Recording/Activity Logging Tools

If a firm’s pre-bill analysis indicates that it will be viable for the firm to move forward with alternative billing, the next step would be for the firm to conduct an itemization of its existing recording and logging tools. This would be done to see if the firm can simply begin to move forward with the arrangements or to see if they need to make some additional purchases, staff changes, and/or procedural changes to do alternative billing. To start the process, the firm should determine how staff currently tracks their time.

While it may be argued that time would no longer need to be kept in firm that works strictly from flat or fixed fees, the reality is this is probably the phase where it is most important to track time – At least in the beginning it is. Alternative billing does not take away the need to describe or show in some results-based way the detail of the work being done for the client. To this end, it is important that the firm continues to track the work being done in meaningful terms in ways that make the overall process for billing easier. A bill showing “breach of contract litigation - $20,000” or “for legal services rendered - $15,000” is not likely to be as acceptable to clients based purely on face value. It might be with more accepted by the client if the billing includes descriptive and itemized services outlined in a way the shows both the effort and value of the services.

Common tools for logging time and recording work performed by firms might include any of the following:

• an automated time and billing application
• pop up or other stop-watch type timers
• general paper timesheets or slips
• mobile apps or built in features for billing on smartphones and PDAs
• online entry screens/portal applications

Bill Generation and Delivery Tools

Bill generation and delivery tools for alternative billing may include various methods of creating and sending out bills to accommodate arrangements outside of traditional hourly billing. Affected like every other area of law by technology, bill generation and delivery over the past 15-20 years has gone through some phases of advancement. The changes have been brought about to deal with client demands, as well as to carry out internal control mechanisms for the billing process.

A prime example of changes to the way bills have been generated and delivered is billing via e-mail or “e-bills.” Most vendor products now have a way for bills to be generated in formats other than those that are fed or merged into word processing software, and will now most often include.pdf (portable document format) and.rtf (rich text format) bills which can easily be attached to e-mails. There has even been a shift in e-billing styles to include the ability for clients to pay off their bills from the e-mailed invoice via credit or debit card with some new invoicing on online bill payment services.

As with regular bills, there should be a method by which firms can bill on demand. In fact, one of the benefits of alternative billing arrangements is that they allow for one-time billing, which can ease the amount of overall tracking that must be done as far as invoices go. If one looks further at the way bills are generated, in alternative arrangement scenarios there may be fewer places for itemized descriptions of activity, and/or more instances of the lumping of expense charges. Following the example of UTBMS (Uniform Task-based Management System) and some systems set up for special corporate bills, i.e. Legalgard and LEDES, many of the codes and descriptions have been abbreviated for easier processing and standardization on bills. These newer delivery models seem to stay in line with current consumer methods of using technology to pay for services, and seem to be only slowed in implementation by the need for firms to take a closer look at any service’s effect on ethical obligations by the firm or risks that could cause any breach of client confidentiality.

Post-Billing Analysis Tools

Information gathered after the bills have gone out can play an extremely important role in alternative billing arrangements. Accepting the premise that firms must continue to track time, or at least keep a log of work that is being performed, firms can analyze both profitability and productivity in ways to help the firm determine whether alternative billing arrangements will be feasible. For instance, they can look at a particular practice area and analyze how much time has been spent in producing certain types of work within that area, and the amount of income that has been realized from that work. This basic analysis can reveal whether or not a particular fee, especially if set at a flat or fixed fee, will be adequate to continue making money for the firm, while at the same time balancing out the value needs of the consumer client.

Post-billing analysis tools found in most time billing programs might include:

• Accounts Receivable reports
• Profitability reports
• Productivity reports (by firm and by user/timekeeper)
• Realization Reports
• User Contribution Reports

Information found in these reports may lead a firm to understand that it is more profitable and productive for the firm to use alternative billing arrangements. This information may also lead the firm to see that the value of work performed actually has a “price,” and that this “price” may be appropriately applied and used either all of the time or in specific instances in billing for delivery of legal services.